starbucks4ever (89.16)

May 2009

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Just as S&P went up when Chrysler kicked off, so it will be this time with GM. One can only regret a series of ridiculous bailouts that did no good to anybody, and one can only feel sorry for shareholders who were misled by the government into believing that a salvation would miraculously arrive (which, I admit, was easy to believe after the bailout of FNM, FRE, AIG, C, and every other crooked bank in the country; but GM was not a bank. If they didn't sell GMAC, maybe they would be saved like C). As to the "economy", or what goes by that name, nothing very serious has happened because it is not GM factories that became bankrupt, but a Communist oasis within capitalism - a pig-headed union that expected to be paid $80 an hour and still compete with Toyota and Honda. When that ballast is thrown away, we'll see that GM factories are quite competitive and even their cars are not that bad. [more]

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Can anybody explain to me the legal aspect of it? Just explain in simple layman terms, what is the difference beween Obama and Chavez? I thought bondholders had a claim on the entire value of the bonds or on 100% of GM (the smaller of the two), shareholders had a claim on 0%, and government and UAW had a claim on 0% if they held the common, or on whatever remains, if anything, after bondholders have been paid off, if they held prefs. Now, all of a sudden, Obama gets 75%, UAW also gets many pleasant things, shareholders get 1%, and bondholders are waiting at the end of the line. What am I missing? [more]

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The classic was right: ruin is not caused by leaking lavatories but it's something that starts in people's heads. The trouble with China is not so much the real challenges to growth that exist objectively (which, by the way, are quite serious in their own right), but the cognitive dissonance of its leaders which prevents them from acting rationally. Whenever that happens, you know that things are going to get very ugly. [more]

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The classic was right: ruin is not caused by leaking lavatories but it's something starts in people's heads. The trouble with China is not so much the real challenges to growth that exist objectively (which, by the way, are quite serious in their own right), but the cognitive dissonance of its leaders which prevents them from acting rationally. Whenever that happens, you know that things are going to get very ugly. [more]

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I have a very simple hypothesis about the temporary success of EWT for the past year. I think that 30 years from now we'll read the memoirs of some GS trader where he'll be describing the dramatic events of 2008-9. It will turn out that the trader in question was in love with the EWT theory at the time (only to abandon it later after a series of disappointments). In the absence of other major players who'd been wiped out just prior to that, the market often did go up or down when GS thought it was time for the market to go up or down. Then, a year later, other players came up with more capital. They brought different trading strategies with them, and soon enough restored the usual polyphony that has existed on the marketplace most of the time. And from this moment on EWT stopped giving correct predictions, and most practitioners lost their 2008-9 gains within the next couple of years due to overconfidence and a series of wrong bets. [more]

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Imagine a mathematician who's been using the body of works on, say, group theory, accumulated over 70 years, making this announcement: "Something didn't seem right, and then it dawned on me: maybe when working with rotations in Euclidean space we should be using 3 dimensions rather than 2". Or a Chemistry professor counting the number of atoms in substance saying: "maybe we should assume that a hydrogen molecule has not 1, but 2 atoms, and this assumption will change the count that we have been using for the past year". [more]

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The only thing he is going to achieve is a collapse of property values - the very thing that scares him witless. These welfare recipients never saw any real income. They were just allowed to hold this money in their hands for a couple of days before handing it over to the landlord. Landlords were the real beneficiaries of the welfare program, putting 2/3 of this government spending directly in their pocket with the remaining 1/3 going to the local Albertsons, or, in the best case, Macdonalds. OK, now the Governator decided to raise money by removing the feeding tube. There is nothing to comment here. Let us just wait and see how long it will be before the Governator is tarred and feathered by six-percenters from the NAR when they discover that another half-million of rental properties have lost their tenants. [more]

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Just managed to get the valuation of Japanese equity markets. 184 trillion yen for 88% of the total market makes the total equal to 209 trillion yen, or 2.2 trillion dollars at the current exchange rate. Japan's GDP was $4.8 trillion in 2008, it should be a few percent less now.Basically, the number say than we can buy Japan at about 50% of its GDP, which is much cheaper than the USA. But before we conclude that Japan is a buy, we must find out if Buffet's metric applies to Japan. In America, public corporations earn 5% of GDP after time averaging, according to Buffett, and I now need to find a similar number for Japan. Two other questions: a) is the yen historically cheap or expensive relative to the dollar, and b) does Japan have a future as an economy, because with the policies followed for the last 25 years, it's clearly getting nowhere. If the answers to these 2 questions are positive, or at least, not overly negative, then Japan could be a better bargain than America. http://www2.standardandpoors.com/portal/site/sp/en/us/page.topic/indices_jp500/2,3,2,7,0,0,0,0,0,0,0,0,0,0,0,0.html[more]

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What if Warren Buffett asked you for $100 to help him buy bread for his children? Without these $100, you're told, he would have to let them starve, and as a socially conscious individual, you surely wouldn't want to let that happen, so you must acquiesce to that demand, no questions asked, right? [more]

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Now S&P has considered lowering England's AAA rating because England is about to reach the debt-to-GDP ratio of 66.9% by 2010 and 100% by 2013. Serve them right. 66.9% is unacceptable because it indicates a Ponzi borrower that could intend to swindle its creditors. Let us appload S&P for making that gutsy statement. But, wait a minute! Is there another country still rated AAA whose debt-to-GDP currently stands at 75% and is poised to exceed 80% by 2010? I think there is. And I bet most of us could even name it. [more]

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2 trillion is the total amount of subprime losses in America, which have instigated this recession, but it was only 1/6 of the GDP. For China, it is 40% of the GDP. True, they will not lose that overnight, but over the next 3-5 years. Yes, it's not the end of the world, if they don't make other mistakes, but don't you think it's a weak bullish case?

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TMFDeej has a post titled "Is the dollar really doomed?" In it, TMFDeej makes a compelling case for the dollar - and the US economy. His main point is deceptively convincing: he argues that China would hurt itself by running things differently, ergo, we again come out ahead, letting China buy our toxic assets that we openly intend to multiply by zero by rampling up inflation. I agree, but for a different reason. I would argue that America is winning, but not through any objective advantages that it has (it has none), but merely through the stupidity, ignorance, incometence, and cowardice of its competitors. [more]

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Like a retailer that puts a $60 sticker on a $50 shirt to then tout what he calls a 20% discount, the Illinois demagogue has now produced his own version of "health care reform": a promice of 1.5% "savings" (that is, reduction in CAGR growth) relative to an unspecified would-be CAGR number that he did not tell us. [more]

This is what I think about Mises, Hayek, and the rest of the Libertarian school. The theory that a bunch of completely free individuals will always put the available resources to optimal use is simply wrong. Here's why.Suppose we are completely free to go about our financial interests. So in a given 24-hour period I purchase some service from you and you sell some other service to me and we negotiate the price based on the current market rates. Let's put the negotiated price at, say, $100. Suppose I am a baker and you're a car mechanic, so you will repair my car for $100, and then I will sell you a cake, also for $100. We thus have an economic equilibrium where 2 people produce $200 worth of services. In other words, our daily GDP is $100 per person, and our CPI is $100 per service. So far everything is fine. The economy is running well. Libertarianism clearly works.Then one day I get drunk and smash my car into a fence. Clearly this was my fault. I have noone but myself to blame. However, it occurs to me that with some little creativity on my part I could make it appear that the accident was due to misfunctioning brakes, and if my lawyer is good enough, I can make the jury believe my story. I estimate my chances and conclude that on the average, considering the probabilities of various possible outcomes, I can expect to win $100 at the very least. So I get a lawyer, pay him $100 (makes perfect sense for me as I expect to win a little more than that) and we go over the papers, looking for every legal opportunity to file some unreasonable claim against you.The next day you get a call from my lawyer. It then occurs to you that you're really in big trouble. If you choose to leave yourself without legal representation, then my lawyer could well squeeze you dry. On the other hand, if you get yourself a good lawyer, then the probability theory suggests that on the average, you will be able to limit your losses to a sum that is slightly above $100. Deep sigh. It's very unfortunate, but you have to make your best bet. So you feel you have no choice but to hire your own lawyer to defend you against frivolous lawsuits such as mine. Sure enough, your lawyer also charges you $100.Now, upon a first glance (imagine for a moment that Socrates has landed in our Libertarian town and takes a look at what's going on) this doesn't make much sense. After all, the lawyers don't create any additional value. As long as we pay them to fight over some limited resource, we are only going to be worse off. So as rational individuals, we are going to have to avoid this needless waste of resources, right?Not so fast. That WOULD be right if we could actually coordinate our actions and agree to pursue the policies that would most benefit us as a group. But that would be against the free-market principles, and besides, there are simply too many of us (after all, our 4-people case study is only a crude simplification!). Even if we did work out a gentlemenly agreement not to sue each other, there would always be some individual who feels that he can benefit more by breaking the agreement than by following it. And then, as any sensible policy can only work when everyone adheres to it, we simply have no choice but to spend our limited resources to protect our enterpreuneurial gains from the other fellow enterpreneurs. So where do we draw a line? Obviously we can't waste money indefinitely, so at some point the system must come to a natural equilibrium. But what is that new equilibrium point?The answer to that question is given by the Libertarian theory. In the Libertarian world, that equilibrium point is determined by the marginal utility. In other words, as long as my lawyer can, on the average, squeeze $101 from you, it will make sense for me to hire him for $100, and it will make sense for him to stick to his legal profession instead of, for example, learning how to bake cakes. On the other hand, my lawyer would, on the average, have won much more than $101, if you, in your turn, did not have an attorney representing you. As long as your attorney can reduce your liabilities from, let us say, $202 to only $101, it will make sense for you to hire him for $100, and again, it will make sense for your lawyer to stick to his chosen profession instead of, say, learning to repair cars. The whole deal makes sense to everybody involved as long as there is even a tiny $1 gain. In the limiting case (just so we can round off the numbers) we can make this gain infinitesimally small, and set all the numbers in this model equal to $100.Now we come to the monetization issue. In the Libertarian world, all goods and services sold are equivalent. No government can decide for you what it is that you should be buying: food or legal services. After all, it is believed that you and only you can determine what's in your best interests. So the legal services will be treated as a legitimate part of the economy, and the money supply will be provided in sufficient quantity to monetize these legal transactions without causing inflation (let's forget for a moment about Bernanke and the Federal Reserve plutocracy). So as long as we want to maintain price stability, we only need to run our 4-people economy with double the money supply vs. the money supply needed in a 2-people economy. So once the macroeconomic goals have been met, evebody is still charging $100 for his services. But wait a minute! Isn't there a contradiction? We just said the car mechanic pays $100 to his lawyer AND loses $100 in court, and all that from a daily revenue of $100? No, there is no contradiction, because it so happened that the very same day the first layer had a flat tire and the second lawyer broke his transmission, so they both spent their $100 salaries at a repair shop and the auto mechanic had not 1, but 3 customers. The $200 that the 2 of us have misspent have after all come back to the economy in the form of consumer demand. The macro- and the microeconomic pictures have now been matched! The money thus completes its circle, every transaction has been monetized, everybody is employed, and every good or service sold has found its buyer. In other words, we have achieved a new economic equilibrium.The only trouble is, we now have two people producing tangible value, and two people assisting them in playing what is, for all practical purposes, a zero sum game. Because it is clear that as a group, the car mechanic and the baker cannot get any richer by suing each other and that the two layers are the only real beneficiaries of this activity. But the economic theory is not concerned with usefullness. As long as workers spend time in the office from 9 to 5 and exchange paper bills, the mission is accomplished as far as the theory is concerned. So despite the fact that everybody is overworked, it's still tough to afford both a cake AND a car with your daily income, because half of the available working force is producing nothing but papers (and, can I add it, getting on everybody's nerves and ruining everyone's psychological health in the process). Notice, however, that we have done everything to keep our Libertarian friends happy. We didn't do any regulation, we just took a hands-off approach and let the market do its job. Suppose, however, that we took a blantantly socialist approach and decreed that free people have no right to pursue their material advantage through the legal system. Ouch! What a horrible system! Not only have we dispensed with the free market, but we have also violated every possible human right, have done away with democracy, broken the Constitution, in short, committed a high treason against the lofty Libertarian ideals. A terrible crime indeed, and the Supreme Court will surely bring back into line. Meanwhile, however, as the Court is still deliberating, we have a very interesting economic outcome. As the nonsense jobs disappear, we can employ the parasitic part of the labor force in meaningful occupations, thus doubling the tangible economic output, or working less hours for the same money, or some combination of both. [more]

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Need data on market cap to gdp for several foreign markets I'm interested in, mainly Japan, but also Europe, Australia, Brazil, Mexico, Russia, India, and China. The first two hours of research got me nowhere...

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One of the last victims of this dramatic turnaround is the belief that one can predict market movements by extrapolating a zigzagging line that one imagines to have seen in the previous market movements.

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When dynosaurs started biting the dust last October, the Obamistas (read: homeowners with mortgages who love high inflation) started filling the cyberspace with cries for help, telling us that the world will end if company XYZ is not bailed out with a trillion newly-printed dollars. In particular, I still remember dire predictions of 20% unemployment and a total economic collapse is the Big 3 are allowed to fail, and I countered right there and then that the only real consequence of Ch11 restructuring is a charge of ownership. And sure enough, I was told then that I was just a primitive simpleton who'd failed to realize that we were in the same boat with Bob Nardelli and therefore the most prudent course of action would be for us to go down if that would help to save that venerable gentleman from the consequences of his ill-thought business decisions. He and his company, I was told, were simply inseparable. It was just like the medieval times when a guy named Henry Tudor would write "we, England" and nobody would doubt that he was, in fact, nothing less than the whole England. So Dick Fuld had become "we, Lehman", Sullivan had become "we, AIG", and whenever Rick Wagoner would walk into a conference hall, we had to write in our blog: "Enter GM". [more]